HOT TOPIC: Supermarket Sweep

Consolidation builds profits for grocers

Food retailers in 2000 averaged a net profit of 1.18 cents on every dollar of sales — a figure that, according to the Washington, D.C.-based Food Marketing Institute, may represent an all-time high.

Between 1970 and 1990, net profits fluctuated, ranging from 0.92 cents and ending up at 0.86 cents per sales dollar. Since 1990, profits increased by 0.32 cents. Consolidation among the largest food retailers may be driving this increase. The past five years have seen a number of mega-mergers among industry giants looking for back-office and supply-chain cost reductions.

Following its acquisition of American Stores (Lucky, Jewel, and Acme), Boise, Idaho-based Albertsons now owns 2,514 stores that gross an estimated $36.4 billion per year.

Pleasanton, Calif.-based Safeway now controls names such as Vons, Dominick's, Tom Thumb, and Randall's, bringing in $32 billion a year through 1,726 stores.

Ahold USA of Chantilly, Va., reports $27.8 billion in sales from 1,208 stores, thanks to acquisitions of major regional players such as Giant Foods in Maryland.

King of the hill

These chains play second, third, fourth, and fifth fiddle to the biggest food retailer in the nation — Bentonville, Ark.-based Wal-Mart Stores Inc., which will log $52.2 billion in gross volume this year according to the Top 75 Supermarket Retailers assembled by the grocery-industry trade magazine, Supermarket News.

According to these rankings, the top five food retailers sell $202.4 billion in groceries per year. A penny from each of those dollars yields a profit estimate for the top five of $2 billion.

Compare that to the five food retailers at the bottom of the list: $3.4 billion in sales and $33.8 million in profits. How many stores will $2 billion in profits finance? How many stores can you build or buy with $33 million?

The penny-ante business of modern food retailing requires an immense base of stores to heave those penny-per-dollar profits higher. These sales pay for massive, centralized technology that can manage food categories, distribution, and advertising, while producing the highest possible profits. In short, consolidation among supermarkets probably won't let up any time soon.

Consolidation — the tie that binds

Consolidation requires developers and owners to cement their relationships with supermarket leaders. Regency Centers Inc., of Jacksonville, Fla., for example, caters to grocery anchors such as Kroger, Albertsons, Safeway, and Publix — the Lakeland, Fla., grocery chain that ranks seventh on the Top 75 list.

“About 90% of our centers are anchored by either the No. 1 or No. 2 grocer in the trading area,” says Mary Lou Fiala, president and COO of Regency. That's no accident. Regency's real estate strategy aims for developments among existing dense population centers or in corridors growing at a pace at least twice the national average, according to Fiala. Regency also requires locations with extraordinarily high household incomes: $75,000 compared to the national average of $58,000.

Columbia, S.C.-based Edens & Avant also develops grocery-anchored shopping centers around the top grocers in each of its trading areas, according to Joe Edens, the company's chairman and CEO. “In evaluating supermarket tenants, we want to be satisfied that there is a commitment by the food retailer for continued growth in the market and that the sales trends, in the case of existing properties, are up.”

Developers agree that secondary locations and secondary supermarkets lead to troubled centers. “Unless you pick the right location, you're going to end up with a secondary retailer,” says Jerald Friedman, director of development for Kimco Developers, a wholly owned subsidiary of Kimco Realty Corp., New Hyde Park, N.Y.

However, there's a flipside to every situation: Consolidation may also threaten the health of centers in good locations. What happens when Kroger buys Fred Meyer and decides to close stores serving the same trading area? A developer somewhere loses out. “Consolidation can be devastating for local developers with the wrong grocer and an 80% mortgage,” Friedman says. “It can hurt a national developer, too, but the national developer has the capital and negotiating leverage to survive.”

The point: supermarket consolidation means developers and owners of neighborhood anchored centers must focus more carefully than ever on the basics of good locations and credit tenants.

Michael Fickes is a Baltimore-based writer.

Fresh new grocery formats

In the past five years, the grocery business has diversified. In addition to consolidating, national chains have developed alternative grocery formats that go beyond the conventional supermarkets. These include superstores and combination stores with full-line pharmacies. Mass merchandising competitors of supermarkets have likewise developed new formats, from warehouse stores through super-centers and hyper-markets to wholesale club stores.

New alternatives continue to arrive. Most recently, supermarkets have begun to experiment with a totally new concept store such as Freshgo by Giant Food, which is operated by Giant Food Inc. Giant is a part of the Ahold USA family of retail food chains.

Opened in December of 2000, the first Freshgo measures 17,000 sq. ft. It serves as a mini-anchor in small strip center Potomac Woods Plaza in Rockville, Md., a suburb of Washington, D.C. Within its small footprint, Freshgo combines a number of food retail features important to today's consumers, including fresh foods, sit down breakfast, lunch and dinner accommodations, grocery staples and a pharmacy.

Another key feature is convenience. Customers can pop in to fill a prescription or to grab a meal, says Martin Roberts, president of Grid 2 International, the New York-based firm responsible for designing the concept.

Responding to Grid 2 research, Roberts altered the conventional supermarket aisle configuration in the design of the store. “We do a lot of research in grocery stores,” Roberts says. “We've found only 17% of shopping trips involve the aisles. Yet the dry goods aisles are the most profitable for a grocery, given the high labor requirements of the fresh food departments situated around the perimeter.”

Like a conventional store, Freshgo's deli and bakery reside around the periphery. But the produce tables, the seating area, and the prepared meal area sweep across the space in the front half of the store. The dry goods and pharmacy aisles flow from the center of the store to the back, where the pharmacy prescription counter is located. As a result, customers browsing the fresh foods areas can always see virtually all of the dry goods aisles.

Such supermarket convenience stores will probably work best for targeted demographic audiences. Freshgo, for example, serves an upscale neighborhood with an interest in quality gourmet foods.

In the end, Freshgo offers Giant an effective infill strategy that can be tailored to the preferences of certain demographic markets. — Michael Fickes